Saving

Chris and his wife are debt-free. They're ready to build their first house, but they're a little short of the 20 percent Dave recommends for a down payment. Should they dip into their fully-funded emergency fund to make up the difference? Dave gives them some guidelines.

QUESTION: Chris and his wife are debt-free and ready to build their first home. They’re a little short on cash for a 20 percent down payment, so Chris asks if they can dip into their fully funded emergency fund for the difference. Dave tries to give him some guidelines.

ANSWER: Well, I don’t know how short a little short is, and I don’t know how big your emergency fund is. If you use a little of your emergency fund to round off the 20 percent, and then you have an emergency, where are you going to be? If you’ve got $50,000 in your emergency fund and you use $10,000 of it, you’ll be fine. If you have $10,000 in it and you use $9,000, that would not be fine. That’s the way you’ve got to look at it. Use a little common sense with the numbers. The problem is, I don’t have your numbers.

I recommend three to six months of expenses set aside for an emergency fund. If you have six months’ worth sitting in the bank and you took it down to three, you’d probably be okay. But if you spend it down to $2,000 and move into a new house, you’re asking for trouble.

I’d love for you to put down 20 percent because you’d avoid private mortgage insurance (PMI), which costs about $75 a month per $100,000 borrowed. It costs you a lot of money if you don’t put down 20 percent. You should try to do that, but don’t be irresponsible on the emergency fund side. Your emergency fund, when it’s there, has a tendency to keep emergencies away. When it’s not there, a lack of it tends to attract emergencies.

QUESTION: Jessica asks what Dave thinks about warehouse clubs. Dave says he likes them, but he cautions her to be careful about overspending.

ANSWER: I’m a member of Costco and Sam’s Club. They’re the two in our neighborhood, and I suspect we save more from my wife shopping there than me.

The thing you’ve got to be careful of with warehouse clubs — and it’s something they’re specialists at — is impulse buying on really large, dumb things. I mean, who needs five gallons of mustard? Who needs 26 gallons of peanut butter? And most of us overbuy, especially those of us who are spenders. I’m a spender by nature. That’s why God makes me teach this stuff every day. I’m still, to this day, bad about overbuying in there.

One of the ways I could tell I had turned the corner spiritually with money after we went broke was I could walk into places like that and not buy anything. It meant that I had reached a level of contentment. So you’ve got to be careful with the overspending and the overbuying in volume.

Are there bargains in there? Oh, definitely. There are some good buys in all those places. We’re big fans.

QUESTION: Deb and her husband are both in their 60s. He’s retired, and she’s still working. They’re debt-free except for their house. They owe just under $100,000 on their home, and they have a combined income of about $200,000 a year through work and retirement income. They take $15,000 out annually for deferred compensation. Deb wonders if they should take some money from the $400,000 they have saved for retirement to pay off the house. Dave has a better idea.

ANSWER: Rather than cash out retirement, why don’t we just slow down retirement? Stop everything, and throw it all at the house until you get it paid off, and leave the retirement alone. I’d rather do that and have the house paid off in about 12 months.

Why not stop the deferred comp idea and throw that at the house, too? Just focus your cash flow on paying off the house. If you take it home, instead of deferred comp, you’re going to pay taxes on it anyway. Deferred comp means you’re putting off your income, so you’re going to pay taxes on it one way or the other.

I wouldn’t mess with your nest egg; given that you’ve got this fabulous income. If it takes you 14 or 15 months to get it done instead of 12, so what? Let’s cash-flow the reduction on that, and you’ll still be in your 60s with the house paid for. That’s pretty cool, plus you’ll have $400,000 in your nest egg and you’ve got the income stream — some of which is you working, and some of which is his retirement.

Valerie and her husband would like to give something to their grandchildren for Christmas other than the usual toys. Dave likes their idea of planning for the future, but he advises them to throw in a few toys, too.

QUESTION: Valerie and her husband have three young grandchildren. They’re in good shape financially and would like to give the grandkids something for their futures instead of the usual toys for Christmas. Dave guides them on the saving aspect, but advises them to include a few toys in the mix as well.

ANSWER: I would do both. I don’t think you want to be those grandparents who only hand their grandkids envelopes at Christmas. They need things to play with. They’re kids, and they should be allowed to act like kids and be happy at Christmas.

You could work with their parents to launch Educational Savings Accounts (ESAs) for them. This would get their college funds started, and it’s what’s we do. We use mutual funds in their ESAs, where each child is allowed to have up to $2,000 added in their name per year.

The beauty of the ESA with the mutual fund inside it is that it’s growing completely tax-free. You have to name a custodian of the account until the child turns 18, and that could be you guys or their parents. Make sure that together you don’t overfund the ESAs and cause yourselves tax problems.